When a person dies, there are many expenses that will need to be paid. These expenses may include such items as funeral costs, burial expenses, current bills, and estate taxes. In addition, there may be financial needs the insured would have met if they had remained alive, including family living expenses, mortgage payments, long-term debt, and college costs for children.
The primary function of a term life insurance policy is to provide, upon death of the insured, an amount sufficient to pay for any or all of the preceding costs and expenses. The insured decides which expenses or costs need to be provided for, and how much money will be needed.
There are many and varied needs for funds upon the death of an individual, and all must be taken into account to arrive at a proper amount of insurance. For simplicity, some authorities recommend a good rule of thumb to be five times your annual income. Your agent can talk with you about your needs and goals, and illustrate how each item translates into a given amount of funds needed at the time of death.
Although there are many types of life insurance policies, nearly all are variations of two basic types, term and permanent. A third type, known as universal life, is a combination of term, permanent and various investment options.
Term insurance is exclusively death coverage. The policies are written for a specific length of time (the term referred to in the name). Common terms are one year, five year, and ten year, although longer terms may be available. If the insured dies during the term of the policy, the death benefit is paid to the beneficiaries. If at the end of the term the insured is still alive, the coverage ends. Unlike term insurance, a permanent insurance policy never terminates as long as the premiums are paid. It also builds cash values in the policy that can provide valuable living benefits in addition to the death benefit.